What Crypto Market Makers Actually Do

Market makers quote continuously on both sides of an order book so that someone wanting to trade can do so without waiting for a matching counterparty. That is the function. The economics and the contracts are where it becomes interesting, and where projects most often make expensive decisions without understanding them.

Why projects encounter them at all

Most teams meet a market maker for the first time around a listing, at which point they are told — correctly — that a listed asset with no liquidity is worse than no listing. The decision then gets made quickly, under time pressure, by people with no background in market microstructure, against a contract whose incentive structure is not obvious from reading it.

That combination is why this is worth understanding in advance rather than during a launch week. The arrangement typically runs for a year or more and shapes how the asset trades for far longer.

The basic economics

A market maker posts a bid and an ask. If both are hit, the spread is earned. The risk is inventory: markets move, and a maker who accumulates a position because everyone is selling holds an asset that is falling.

Spread compensates for that risk. Wider spreads in volatile or thin markets are not gouging — they are the price of someone standing ready to take the other side of a trade in conditions where nobody else will.

Order books deepen when several makers compete, which narrows spreads. In thin markets a single maker may be most of the visible liquidity, and their withdrawal is indistinguishable from the market disappearing.

The two deal structures

How a project pays a market maker determines what the market maker is incentivised to do, and the two common structures differ substantially.

Retainer

The project pays a monthly fee. The maker commits to obligations: maximum spread, minimum depth at defined distances from mid, minimum uptime.

Incentives are relatively clean. The maker is paid to provide a service and is measurable against stated obligations. It costs real money and it is the structure most aligned with a project wanting a functioning market.

Loan and option

The project lends tokens to the maker, who uses them as inventory. The maker receives a call option to buy those tokens at a set price at the end of the term.

Cash cost to the project is low, which is why early-stage teams prefer it. The incentive structure is materially different: the maker’s return depends heavily on the option, and an option gains value with volatility and with price appreciation. A structure meant to produce orderly markets can therefore pay best when markets are not orderly.

This is not an accusation about anyone. It is a description of what the instrument rewards, and it is worth understanding before signing one. The mitigations are the obvious ones: obligations specified and monitored, strike and term set carefully, and the loan sized so that the maker’s position cannot dominate the book.

What to specify in either case

• Maximum spread, and at what order size it must hold.
• Minimum depth at defined percentage distances from mid price.
• Uptime obligation, and what counts as an outage.
• Which venues, since obligations on one exchange say nothing about another.
• Behaviour during extreme volatility — the moment obligations matter most and are most often suspended by a clause nobody read.
• Reporting: what the project receives, how often, and whether it is independently verifiable.

Reading a market from outside

Depth matters more than volume. Volume can be produced by trading with yourself; depth at a meaningful distance from mid is harder to fake and describes what would actually happen if someone sold.

Watch behaviour under stress. Liquidity that disappears the moment it is needed was never liquidity — it was quotes. The useful observation is what the book looks like during a sharp move, not on a quiet afternoon.

And be sceptical of consistent, evenly-distributed volume across many venues with thin books. That pattern is more often an artefact of wash activity than evidence of a healthy market.

None of this is advice about trading or about any venue. It is the structure that determines whether a market functions when it is tested.